Economists React to NFP

The WSJ reports: 

The Labor Department announced Friday morning that U.S. employers added 207,000 jobs to nonfarm payrolls and that hiring in the previous two months was stronger than original thought, by a net 42,000 jobs. Meanwhile, the unemployment rate held steady at 5% and wages jumped 0.4%, the strongest increase for hourly earnings in a year. With the Federal Reserve prepared to deliberate on interest rates next week, what does the employment report tell us about the economy? Economists from Wall Street and beyond weigh in:

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A strong reading across the board with the oversized gain in average hourly earnings, at least partially if not mostly, due to an oversized 1.7% increase in earnings within the utility sector. The exact size of its contribution cannot be determined at this point.  The gain in nonfarm payroll, the upward revisions to June and May, and the ability of the unemployment rate to hold at 5%, despite it having fallen there due to a 1k increase in the labor force in June, also points to healthy employment growth (employment in the household measure was up 438K and the labor force did jump 450K).  All signs point to strong growth in the second half of 2005.
— David Resler and Gerald Zukowski, Nomura Securities International

Most measures of the labor market indicate that the degree of slack is slowly disappearing. The official unemployment rate is the most positive. Although other measures indicate that there are more available labor resources, they too are also slowly improving. As labor market slack disappears, the FOMC will continue to boost short-term interest rates.
— Steven Wood, Insight Economics

The economy is accelerating after a mild slowdown in the second quarter. Third-quarter growth should be above 4%. For consumers, employment and earnings gains are outweighing the drag from high gasoline prices. The solid growth picture indicates that the Fed’s measured tightening has some way to run. We expect the federal funds rate to reach 4.5% in the first quarter of 2006.
— Nigel Gault, Global Insight

The small dip in manufacturing employment was a mild surprise. For some reason, the factory job tally over the past two months does not reflect the recent solid gains in motor vehicle assemblies. In fact, autoworker employment is down 28,000 over this interval. … The hours worked index came in a tick lower than anticipated. Given the strong GDP number that is expected in Q3 (+5.0%), we could see a sharp rise in productivity if hours do not show some upside in Aug & Sept.
— David Greenlaw and Ted Wieseman, Morgan Stanley

The problem for the "bond dudes and dudettes" was the surge of wage inflation that came from the Average Hourly Earnings, which doubled the previous month’s number at up 0.4%. I want to make one thing perfectly clear: if this is the beginning of a wave of labor cost increases, all bets are off on the long end of the bond market. There will be little to stop the 10-year from going to 4.50%, in the short-run.
— Kevin Giddis, Morgan Keegan & Company

What needs to be watched is the wage situation. Was the jump in wages a one-shot wonder or does it portend accelerating labor costs? That is the unknown right now. But if it does say the tightening labor market is finally flowing through to workers in terms of higher payroll costs, then the Fed may find even more reasons to continue the rate hike program.
— Joel L. Naroff, Naroff Economic Advisors


Economists React
August 5, 2005 10:05 a.m.,,SB112324872837406088,00.html

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  1. spencer commented on Aug 6

    Interestingly, the uptick in employment growth is not being accompanied by an uptick in hours worked or average weekly earnings. Hours worked growth on both a three month and year over year basis are actually slowing.

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